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ROMANIA: An Introduction

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Romania – Country Overview 

by Adriana Gaspar, Senior Partner and Claudia Lazăr, Associate

Romania has consistently been recommended for investment by all major international rating agencies, and has maintained that once again for 2018. This strikes a much needed balance between fiction and reality with regards to the country's business ecosystem, and between 'difficult but worthy' and 'impossible' in terms of investment pursuits.

In a nutshell, Romania has been a member of the European Union since 2007 and has a recognised functional market economy, and an EU-shaped legislative and institutional framework generally capable of bridging investment culture gaps. The country is the strategic gatekeeper to the CEE region and an essential partner in the Black Sea area for the North Atlantic Treaty Organization. EU membership offers eligibility for a wide range of EU funds and continued monitoring of the implementation of anti-corruption measures, while NATO membership vouches for a stable and secure environment.

The economy in Romania has demonstrated fast and vigorous development in the years following the global financial downturn in 2008. There has been steady GDP growth that is forecast to decelerate but to remain at a robust 3.5% annual average subsequent to an outstanding 6.9% boom in 2017. Meanwhile inflation is expected to progressively decrease in 2019 and 2020, having reached a peak in 2018.

In terms of taxation, Romania has implemented some of the most competitive rates in the EU and 2019 is envisaged to bring about a decrease of the general VAT rate from 19% to 18%, together with an overall simplification of the taxation system and related bureaucracy by merging or altogether eliminating a number of taxes. Nevertheless, the sustainability and targeted growth-fostering outcome of such measures depends on the breadth and effectiveness (in terms of substance and timing) of concurrent structural reforms which are still to be developed.

A recent and mounting pressure on the economy relates to the shortage of an educated workforce, resulting from emigration. Currently, there is no government-mandated action plan to reverse the trend on a short to medium term. In certain geographical areas of Romania and certain industry sectors hit by negative unemployment, businesses have temporarily and successfully accessed a foreign workforce which has allowed them to remain price-competitive; however, this is subject to (non-deterring) contingents and logistical difficulties.

A more historical challenge is Romania’s economic progress outgrowing existing infrastructure capacities. This is partly a consequence of Romania’s relatively unstable political environment in the past decade, which has been inhibiting the institutional ability to develop and pursue a country strategy which would offer predictability and facilitate a convergence of policies, efforts and resources. Frequent staff changes are draining the already scarce experience and know-how in the public sector and negatively impacting the continuity of projects, and vital public-private interaction and budgetary constraints limit the Government’s capacity to fuel critical growth-conducive measures, including infrastructure development.

The Government has recently tabled an ambitious stream of projects, including approximately 750 km of motorways, a high-speed railway connecting the capital city to Cluj and Budapest, a new Bucharest metro line, additional commercial facilities for Constanța Port (which is a gateway to the European Union for seaborne freight and the inception point for the Constanța–Rotterdam logistics corridor), several hospitals, hydropower facilities and tourist resorts. PPP arrangements are anticipated for these projects.

Romania's richness in natural resources has been an important trigger for some of the world’s largest players in the sector for the last 25 years. Onshore reserves of oil and gas, copper, gold, coal as well as other resources have been complemented in the past years by offshore oil and gas reserves discovered in the Black Sea. The exploitation of gas deposits in the area is among the top priorities for the first EU Energy Security Strategy, which aims to reduce Central and Eastern Europe’s reliance on imports via Ukraine. However, this is subject to available transportation capacities outside Romanian borders. Royalties and other related fees to be paid by investors are still competitive and it is a realistic expectation that they will remain so.

As an industry, energy offers the entire range of value-added and speculative investment potential, despite the legal challenges. Domestic and trans-national projects involving Romania are already ongoing or in the pipeline, and being targeted as the best investment opportunities.

Romania’s agriculture capitalises on one of the lowest prices per hectare of land in Europe and the availability of approximately 500,000 hectares of tradable land. This means a high potential for speculative investments, estimated to reach up to 800% return on investment. Romania also has one of the largest agricultural surfaces among EU countries, with approximately 8% of the total agricultural surface in the European Union, in addition to high fertility or low costs for the restoration of lands and the continuation of non-reimbursable EU funding.

Construction, manufacturing (primarily automotive) and services (such as renting, financial services, healthcare and transportation) are also among the key growing industries. In recent years, industrial parks have become increasingly attractive to both domestic and foreign investors seeking efficient infrastructure and logistics (easy access to public roads and utilities) and financial benefits. Presently, Romania is a hub for over 80 industrial parks, generally located in the vicinity of urban areas.

Given Romania’s highly developed internet infrastructure, world-leading internet speed and strong pool of young and skilled tech talent, the IT sector has become a heavyweight, with technology being considered a primary stepping stone for growth. The city of Alba Iulia has become the first “smart city” in Romania aiming to integrate and utilise technology to increase the efficiency of processes, reduce administrative costs, bureaucracy and corruption concerns, facilitate communication with local authorities and improve the overall quality of city life. If implemented successfully, this pilot project is expected to be replicated in other large cities throughout the country.

While Romanian software developers are giving entrepreneurship a go and designing products for the global market, the start-up environment has seen a massive increase in funding, with crowdfunding becoming an important avenue of financing early-stage entrepreneurial tech projects. Notable support is coming from the Bucharest Stock Exchange and from large corporations with a presence in Romania.

With the backdrop of the country’s economic and institutional profile, which has been very briefly presented above, it has become a largely shared view that Romania is inadvertently perceived as investment-difficult by window-shoppers but is justifiably recognised as a true window of opportunity for investors with long-term strategic vision. Romania’s investment potential has remained high and the country has thus maintained its preferred position among peers, prompting existing investors to continuously expand and consolidate their positions in the country, to preserve the prime mover’s advantage.